An employment report that had something for optimists and pessimists indicated to some advisers and investors that the Federal Reserve is unlikely to raise interest rates until at least September and maybe later, setting the stage for a sharp rally in stocks.
“There's actually a lot going on driving this huge rally, but mostly the market now believes the June rate hike is off the table,” said Douglas Coté, chief investment strategist at Voya Financial.
The fact that the
government reported that 223,000 jobs were created in April was less significant from a market perspective, Mr. Coté said, than the government's dramatic downward revision of the March jobs data to 85,000 jobs from 126,000.
“The market likes lower rates longer,” he said. “But, if not June, surely there will be a rate hike in September.”
If nothing else, Friday's strong market rally, coupled with the split-personality jobs report, has added fresh fuel to the debate over when the Federal Reserve might institute the first rate hike since 2006.
“I've been saying all along that the Fed will not be raising rates this year,” said David Haraway, principal at Substantial Financial.
'NOT-TOO-HOT AND NOT-TOO-COLD'
“That's why the market is rallying, because the jobs report is diminishing in the minds of some market participants that the Fed needs to tighten,” he added. “I'd call the jobs report not-too-hot and not-too-cold, and showing that the economy is just right for the Fed to not have to tighten.”
Mr. Haraway said the Fed will take any excuse it can find to not raise rates, and the markets will, likewise, take any excuse to push toward the upper end of what has been a range-bound run for stocks.
“We have been seeing the S&P support on the lower end at around 2,060, and resistance on the upper end at around the 2,125 level,” he said. “That gives you about 65 points worth of excitement, and this was just an excuse to go to the top of the trading range today.”
By afternoon, the Dow Jones Industrial Average and the S&P 500 spiked 1.4% and 1.3%, respectively, and were just off their highs for the day. The S&P was hovering around 2,116, up 28 points while the Dow added 258 points to 18,182.
MORE JOBS
Rick Rieder, chief investment officer of fundamental fixed income at BlackRock Inc., described the jobs report as evidence favoring an “initial policy-rate lift off by the Fed in September.”
Even with the downward revision for March, Mr. Rieder said, more jobs have been created over the past 24 months than the 13 previous years combined.
“We think that something is changing in labor markets today, whereby as the jobs recovery matures, it will likely witness a moderation in the impressive strength of overall payroll gains, but simultaneously, wages should continue to see accelerating improvement, and eventually productivity numbers should rise from disappointing levels,” he said. “Today's movement in average hourly earnings, of 0.1%, disappointed somewhat and does not confirm the trend of consistently higher wages seen in other data.”
Even if wages have been flat for the past six years, Mr. Coté said the market applauded the fact that the unemployment rate fell to 5.4%, the lowest level in seven years.
From a bigger-picture perspective, Mr. Coté bundled some recent developments into what he described as
April Fool's effects that are all positive for financial markets.
“Everything everybody was expecting to happen in April was reversed,” he said.
The short list of “everything” includes positive first-quarter corporate earnings, against forecasts to the contrary, rising oil prices off the $40-per-barrel low, and a reversal of the slide by European bond yields and the value of the euro against the dollar.
“Investors found themselves fooled by April contrarian markets,” he said.
